Escrow 101: What is it and what can you expect?
As a leader in the title industry, there are a few things we know for sure: buying a home is both exciting and overwhelming. Let’s take a minute to walk through the home buying process, specifically the escrow part of the transaction, and break down the process from start to finish.
What is escrow? Being in escrow is sort of like being in limbo. It’s the process between the time a seller accepts an offer to purchase and the buyer takes possession of the home. We consider it the midpoint of the homebuying transaction.
The escrow process begins with the title company opening an escrow account. Once both you and the seller agree on the terms of the purchase agreement, your real estate agent will collect your earnest money (or you may deposit it directly with the title company), which is basically like a good faith deposit and deposit it into the escrow account. The earnest money will be applied to your closing costs and/or down payment.
From here, the escrow account is managed by a neutral third party, like Stewart Title, who holds the funds and documents, including the earnest money, loan documents and signed deed, until the end of the closing process.
The next step is the appraisal. This is where the bank or lender does its own appraisal of the home, to ensure loan amount doesn’t exceed the property’s appraised market value. This is in the lender’s best interest in case it ever needs to foreclose on the property. The buyer is typically responsible for paying for the appraisal; however, this may be negotiated in the purchase agreement.
Next, you’ll want to finalize your home financing. You should’ve already been pre-approved for a mortgage loan when your purchase agreement was accepted. The lender will then give you a loan estimate detailing your loan amount, interest rate, closing costs and other costs associated with the purchase. Once signed, it may remove any financing contingencies that existed in the purchase agreement.
Now you’ll want to approve the seller disclosures. Here, you’ll receive written notification of any problems that have more than likely been previously identified by the seller or the seller’s agent or mentioned in the listing.
This next step is optional, but highly recommended. You’ll want to obtain home, pest and environmental inspections. This helps combat any surprises after moving into the home. Things like dangerous and costly defects, termites and rats, and mold and asbestos can be identified through these inspections and save you a lot of time and money.
If any of these problems arise during the inspections, you’ll want to know so you can either back out of the purchase, ask the seller to fix them or ask for the buying price to be lowered so you can take care of the expenses yourself.
Once that’s handled, you’ll want to make sure you purchase hazard insurance. It usually includes homeowner’s insurance – which is required throughout the duration of your mortgage anyway – and any other coverage required in your area. You can choose your own insurance company, like Stewart Insurance.
The next step is required by your lender but is in your best interest. It’s the title report. The title report ensures the property is free and clear of liens and defects, and that only the seller can pop up claiming ownership. If the title report doesn’t come back clean, the seller will be responsible for clearing up the title or will let you walk away from the transaction. If all is well with the title report and you’re still moving forward with the purchase, it’s a good idea to do a final walk-through and reinspect the property before closing. This is your opportunity to make sure there’s no new damage and that all items specified in the purchase agreement have been left in the home.
At least three days prior to closing, you’ll receive a Closing Disclosure. You’ll want to review this document carefully and thoroughly. The terms outlined in this document should be like the loan estimate you signed at the beginning of the process. Look out for unexpected or excessive fees, or any plain mistakes.
Finally, you’re ready to close escrow. Closing processes vary by state, but generally you’ll sign numerous documents, either traditionally or digitally. Take your time and read through the documents. The seller will have paperwork to sign, too. Once all documents are signed from both parties, the escrow officer will draw up a new deed naming you as the property’s owner and submit it to the county recorder. You’ll pay the remaining down payment and closing costs, and the home is finally yours.
Now, we know that was a lot of information to take in. But hopefully this process is now easier to understand and a bit more digestible. Remember, you won’t be doing this alone. Your real estate agent and title company will be there to walk you through every step of the process and help make your experience as smooth as possible.
*Timing and steps portrayed on this page will vary by region/market. Contact your local loan officers, title agents, attorneys for more information.
For more information on the closing and escrow process, review these links below: